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Miner sues ex-CEO in China gold scandal

Southwestern Resources Corp., plunged deep in a mining scandal, is suing ex-CEO John Paterson, accusing him of fraud, breach of fiduciary duties and insider trading after an investigation showed alteration of assay results at its Boka gold project in southern China.

By Thulasi SrikanthanStaff Reporter

Tues., Aug. 28, 2007

Southwestern Resources Corp., plunged deep in a mining scandal, is suing ex-CEO John Paterson, accusing him of fraud, breach of fiduciary duties and insider trading after an investigation showed alteration of assay results at its Boka gold project in southern China.

While there were still indications of gold mineralization in drill samples and historical mine workings, Southwestern yesterday said mineral resources were less than previously reported at the Boka project in Yunnan province.

Shares of the junior B.C. miner tumbled 17 per cent in Toronto yesterday to close at $1.70 – a stark contrast to early 2004 when its shares soared past $20 on reports of spectacular gold deposits at the Boka project.

"We are doing the best we can," said David Black, chair of Southwestern, in response to questions yesterday about the filing at the Supreme Court of British Columbia.

"Paterson engaged in a course of deceitful and dishonest misconduct, in breach of his contractual, fiduciary, and statutory duties" owed to Southwestern, the company alleges.

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This resulted in the former chief executive officer "misrepresenting the assay results from the Boka project and delaying the completion of (Southwestern's) pre-feasibility study for the Boka project to cover up the misconduct."

Paterson's actions were not only "fraudulent and improper," the company claims, but they were also "reprehensible, high-handed, reckless, wanton and callous."

None of the allegations have been proven in court.

Southwestern said an independent mining consultant has been conducting a comprehensive review of the Boka project and now has largely completed a validation of the drilling database in respect of the gold assay data for the exploration work to date.

The mining company has commissioned a new mineral resource estimate and accompanying technical report for the Boka project, which is expected to be completed in about eight weeks.

Chris Freimond, a spokesperson for Paterson, yesterday released a statement, noting that "Mr. Paterson has taken note of the company's statement, but had no comment at this stage."

"He is still undergoing treatment for clinical depression," said Freimond, adding that this was an ongoing condition for Paterson who has been in and out of hospital.

The documents allege that Paterson "altered or had someone under his direction and control alter the Original Assay Results, both in electronically and paper format."

Falsified assay certificates were then also created to match the alerted results, the documents allege.

"In carrying out his deceitful and dishonest misconduct, Paterson increased the assay values for actual gold found in certain samples by varying, but yet to be determined, amounts," the documents claim.

Southwestern also claimed in the court filing that Paterson, knowing the results were false, "caused" the company to make disclosures, as it would benefit him as a shareholder.

According to a regulatory filing in May this year, Paterson personally held 789,250 shares of Southwestern.

Global Gold Corp. in a regulatory filing earlier this year was listed as holding about 7.27 million shares of Southwestern.

After an extended delay in a project pre-feasibility study, the company said Paterson resigned after demanding and receiving a payout of $264,000.

Wendell Zerb, an analyst with Canaccord Adams, said Southwestern's legal actions would do little to set aside investors' concerns.

"At the end of the day, there appears to be a fairly large fraud in place," said Zerb, who recommends selling Southwestern shares.

"I am concluding there is limited economic potential at Boka, which is frankly tragic," said Zerb. "I don't think it's something that anybody associated with this company, from the board to colleagues of these people who are involved, to analysts to independent engineers, you name it, I don't think anybody would have expected something like this."

The company said yesterday it is seeking to recover all damages and losses it has incurred as a result of Paterson's alleged misconduct, including $1 million in punitive damages, and the costs of its legal action.

Southwestern said it is also consulting with lawyers in China to bring action against the former general manager of the Boka project, John Zhang.

Meanwhile, Jay Strosberg, a lawyer in a $320 million class action filed by Sutts, Strosberg LLP and Siskinds LLP, called yesterday for investors who bought shares based on Southwestern's prospectus that included the Boka project to come forward.

"This strengthens our position or it verifies the class-members assertions at the outset," Strosberg said.

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